A breakdown between stocks and bonds is game changer, Nick Colas warns

The major indexes tumbled Wednesday. The S&P 500 and Dow fell more than 3 percent for their worst day on a percentage basis since Feb. 8. The Nasdaq plummeted 4 percent for its worst day since June 24, 2016. The Cboe Volatility Index, which measures volatility, surged above 20 for the first time since April.

Yet, Colas doesn’t believe the latest activity is the death knell for the record stock market rally. Despite the correlation and uptick in volatility, he’s not calling for a prolonged deep sell-off or recession to hit the U.S. over at least the next 15 months.

However, a big question remains. Can investors stomach the ride?

“Investors will feel a lot more risk than they have over the last two decades. It’s a very important change from the last 20 years,” Colas said.

He sees two options that could mitigate the effects of the broken correlation.

“Reduce the length of the bonds that you own. So, shorten duration,” Colas said. “The second choice is just use cash as your bond allocation for a while. You’re getting 1.50 to 2 percent in cash.”

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